On the UK Labour Market “Mystery”
I’m genuinely confused by Simon Wren-Lewis’ post on “Behaving Like Luddites” and wanted to offer a decent response. A reasonable but condensed version of Simon’s argument, is, I hope:
Bad demand-side policy has caused UK output to stagnate. Due to a supply-side problem of falling productivity, employment has risen strongly – but this is not something we should celebrate.
I have a few problems with this:
1) I could apply exactly the same logic to the early 1980s, and I don’t think Simon would endorse that view. i.e. “In the initial recovery from the 1979-81 recession, real GDP grew fast. It’s true that unemployment carried on rising until 1984, but this was due to a huge rise in productivity, not bad demand-side policy.” That argument seems completely consistent with using “changes in productivity” as an “excuse” for the employment data post 2010. (Yes, this comparison is over-simplified.)
2) Is it not fair to distinguish demand-side shocks which impact employment from other shocks which impact output – and isn’t it fair to consider exactly what shocks are hitting the UK? Supply shocks such as the 1973 oil shock did not impact employment; the lowest recorded point on the ONS series for the unemployment rate is in late 1973 when the UK had been in recession for two quarters. That was a supply-side recession with low output and very high inflation.
3) If you look at the breakdown of GDP by income in the national accounts, it is not quite so obvious that rising employment is really a “mystery”. Here’s one view:
% Annual growth. Source: ONS.
This is derived from Scott Sumner’s “musical chairs” model as in earlier posts, and I am merely ripping off Scott’s many posts on this subject as usual in this post. What is surprising in the above table is that since 2010, even on a per capita basis, we’ve see a rising growth rate of “labour income” – defined as total wage income for employees plus mixed income, albeit still at low rates. It seems possible based on that data to claim that:
a) flexible nominal hourly wages plus rising nominal incomes is a sufficient demand-side explanation for rising employment and actual hours worked,
b) hence, the stagnation of output, and particularly output per hour worked, is at least partly the real mystery with the UK macro data (pun intended)
For many countries in the Eurozone I’m sure you could make the claim that fiscal austerity has caused people to do less work, and find confirmation in the macro data. At least for 2012 in the UK, you’d have to claim that fiscal austerity has caused people to do much more work producing the same amount of stuff. That sounds like a supply-side effect, not demand-side.
My bias is that there’s probably a measurement problem with the price indices, i.e. the NGDP figures are roughly right but we are getting the real/inflation split badly wrong. I see deflationary trends wherever I look. But the supply-side pessimists have an argument which must be attacked analytically rather than idly dismissed.
This was a rambling post already, but, lastly, 2012 was a weird year if you believe all the current data. Hours worked soared; the last time hours worked rose that fast on an annual basis was during the Lawson boom. Yet in 2012 output rose only 0.2% rather than the 4-5% seen under Lawson. That’s just really, really strange; dismissing such evidence because “Luddism is bad” seems much too hasty.